Emerging Trends in Real Estate® Asia Pacific 2013

TOKYO (December 12, 2012) – The outlook for Tokyo’s real estate industry over the next 12 months is improving, with the recovery marked by the return of foreign investors to the city, according to Emerging Trends in Real Estate® Asia Pacific 2013, published by the Urban Land Institute (ULI) and PwC.

The widely anticipated forecast provides an overview of Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is being released today at a program hosted by ULI Japan and PwC.

Of the 22 markets included in the report, Tokyo is ranked 13th for investment prospects and 18th for development prospects, with many investors growing increasingly confident about the city’s rebound. Emerging Trends characterizes Tokyo as a magnet for foreign investment, with several funds opening offices and relocating staff to the city. Typically, core funds are focusing on the office sector.

In addition, there has also been a move into more niche sectors, with a number of investors seeing potential in logistics, as the country rebuilds its distribution infrastructure after the tsunami of March 2011. Outside of Tokyo, the prospects for cities are less promising, with Osaka ranked at the bottom for both investment and development prospects, largely due to an oversupply of Class A office space.

For Asia Pacific as a whole, steady economic growth, rising incomes, and stable or increasing property values are all contributing to an overall sense of optimism. However, the outlook is tempered by growing concerns among investors that prime assets in key real estate markets are becoming overpriced. For instance, capitalization rates across Asia remain more compressed than in many western markets, and yields for core office stock in cities such as Beijing, Hong Kong and Singapore are returning as little as two percent.

“With high rents, high capital values, low yields, and an abundance of local capital, many international investors are struggling to see attractive investment opportunities in Asia Pacific’s prime real estate markets,” commented ULI Trustee and ULI North Asia Vice Chairman Richard Price, Chief Executive, Asia Pacific for CBRE Global Investors. “As a result, investors are expanding their horizons as they seek compelling investment opportunities. Some are looking at frontier markets such as Indonesia, while others are revisiting often overlooked capitals such as Kuala Lumpur and Bangkok, which explains the strong showing for these locations in this year’s report. Secondary markets such as Kowloon in Hong Kong and second-tier Chinese cities are also experiencing increased interest from international buyers. At the same time, core investment markets in many mature, western markets are seeing a surge in demand from newly formed Asian Institutional Investors seeking to capitalize on the post-global financial crisis corrections there.”

Hiroshi Takagi, PwC Japan’s real estate leader, adds that the consensus among investors is that Tokyo real estate hit bottom in 2011. He said that he is now seeing increased interest from both Japanese and overseas investors, especially for logistics and Grade A offices. The strength of Japanese banks, the increased investment in real estate by domestic and foreign institutional investors and the return of Japanese REITs to the market makes the outlook for Tokyo next year a positive one.

Top Investment Markets for 2013

Overall, respondents were more bullish on the prospects for individual cities, awarding higher scores than in the previous two years. The top five investment markets for 2013 are predicted to be:

Jakarta - Topping the rankings for both investment and development for the first time, Jakarta is described as a “surprising” choice given the city’s lack of investment grade stock and its economy, which while growing, lacks the enterprise, scale and infrastructure of its more developed neighbors. However, Jakarta is seen by many real estate professionals as the most favorable emerging market in the region, with business transactions generally easier and more transparent than in other frontier markets such as Vietnam. The country’s interest rates and inflation are stable; the gross domestic product is growing steadily; and foreign direct investment grew by 39 percent in the first half of 2012. Demand for property is strong, resulting in year-to-year office rents leaping by 29 percent. Despite some challenges, such as difficulties securing bank debt and locating reliable local partners, Jakarta holds significant promise.

Shanghai – Shanghai’s office market and retail market have proved mainstays for foreign funds looking to invest in Chinese real estate. Both sectors remain popular, given the city’s relatively user-friendly business environment, growing volume of institutional grade properties and historic market performance. However, in spite of Shanghai’s strong ranking, the city is not as appealing to foreign investors as it was a few years ago. Prices are considered to be relatively high, the market has become saturated, and Chinese regulators have become less open to foreign investment, as they have increasing confidence in the ability of local real estate practitioners to finance and develop properties. While Shanghai will remain firmly on the radar of foreign funds with a mandate to invest in China, activity in the city will remain muted for the short term.

Singapore – Singapore retains its popularity among real estate investors who see the market as a safe haven offering solid, but not spectacular, returns that are underpinned by the city’s position as a global financial hub. The city’s office market has recently run out of steam with significant amounts of new Grade A office space drawing tenants away from existing buildings, a problem which is compounded by a shrinking head count in the local financial sector. Rising vacancies and falling rents are causing problems for some international funds looking to exit the market.

Sydney – Sydney has seen a limited amount of new supply of commercial space in recent years, although a significant amount of office and retail space is in the pipeline for 2015. A shortage of institutional grade property has continued to suppress sales volumes and kept prices buoyant, driving up total returns for office assets. Australia has absorbed more international real estate investment over the past year than any other country in the Asia Pacific region. Office assets remain a popular target for these funds and some analysts believe that foreign investors account for 30 percent of the transactions in the sector.

Kuala Lumpur – Kuala Lumpur is beginning to enter the real estate limelight, offering a stable market with good opportunities for opportunistic returns. While property sales slowed noticeably in most Asian markets during the third quarter of 2012, Kuala Lumpur was the exception. The long-term prospects for the commercial property market are deemed by many to be strong, due to the success of the government’s Economic Transformation Programme in drawing foreign investment.

In addition to Shanghai, other cities in China – including several second-tier cities as well as Beijing -- were placed in the top ten listing for both investment and development prospects. Despite concerns related to rapid growth and surging prices, the report points out that it is not unusual for emerging markets to witness unexpected price movements, and that such shifts must be viewed within the context of local market conditions.

Emerging Trends is based on the opinions of more than 400 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants. It is being released at a series of events throughout Asia that are being hosted in November and December by PwC and ULI Asia Pacific, which serves ULI’s nearly 1,000 members in the Asia Pacific region.

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About the Urban Land Institute

The Urban Land Institute (www.uli.org) is a global nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. Established in 1936, the Institute has nearly 30,000 members representing all aspects of land use and development disciplines.

About PwC

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About PwC Japan

PwC Japan (PricewaterhouseCoopers Japan) represents PricewaterhouseCoopers Aarata, PricewaterhouseCoopers Co., Ltd., Zeirishi-Hojin PricewaterhouseCoopers and their subsidiaries. Each entity is a member firm of the PricewaterhouseCoopers global network in Japan, or their designated subsidiary, operating as a separate legal entity.